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Mergers: A cautionary note in difficult times

The current economic climate has everyone scrambling – looking for ideas that will help them weather hard times. Many in the nonprofit sector are looking to mergers as one solution. Mergers are often a good strategic move for nonprofits. This is especially true when the merged organization is able to more fully realize its purpose – greater social good. However, there are also ill-conceived mergers that represent setbacks for those the nonprofit exists to serve; in the midst of this heightened interest in mergers, nonprofit leaders should weigh both the motivation for pursuing a merger and the expectations regarding what a merger should accomplish.

What can we learn from the for-profit sector?

Nearly all of us have experience with mergers. In the financial sector, small local banks have been gobbled up by ever bigger banking systems now stretching coast to coast; Macy’s has become the ubiquitous department store in the United States.; US Airways and America West Airlines (AWA) merged as they and other legacy carriers were being challenged by new low-cost airlines. These mergers have brought some advantages – it is likely that US Airways would not have survived without the merger with AWA. Macy’s has greater “buying power” than the smaller retailers that it absorbed, and that may translate into better prices for consumers. For a time, bank mergers boosted the value of bank stocks, providing a benefit to many individual investors. However, there have also been some significant trade-offs as a result.

Most of these trade-offs relate to the underlying reason for nearly any for-profit merger. It’s a strategic move to enhance the financial value to the owner or shareholder. This is often accomplished through gaining market share by eliminating a competitor. When competition is eliminated, customer service can be compromised. For example, in the post-merger period, there may be some opportunities to reduce redundancy in staffing, but employees are often cut – sometimes to the point at which there is direct impact on the consumer – in an effort to trim costs in order to boost the bottom line. The shareholder’s or investor’s interests are being served even if the consumer’s experience isn’t better – and with fewer competitors for customers to turn to, there may be little downside for the merged corporation. As a consumer, you have probably experienced some of this firsthand.

What’s different about mergers in the nonprofit sector?

Nonprofit corporations exist to serve a very different kind of bottom line. They are in business to provide a social good – to feed the hungry, protect the environment, seek social justice or protect human rights. Nonprofit organizations that are better able than others in their field or community to deliver on their social goals should pursue any legitimate path to position themselves to do more good – including mergers or other forms of partnerships.

Merger is often a wise move that accomplishes both greater impact and achieves greater efficiency when the underlying motivation is to better protect the environment or provide a stronger social safety net. We have repeatedly seen that merged organizations are ultimately more stable; they have larger staffs with more diverse skills and greater sophistication in management; they are able to access more sources of funding and are able to attract the most talented board members. Much of their greater effectiveness and efficiency comes as they reach a scale of operation that allows specialization and more robust administrative systems.

However, we have also seen organizations approach a merger with no goal beyond survival. The organization may accomplish this goal, but it is at times done through cuts in programs and services or through a geographic expansion that simply spreads the same level of programs/services over a larger area. Just as there are exceptions in the for-profit sector – especially when a business is foundering, but a single unit remains viable – there are exceptions in the nonprofit sector. There are mergers that are the nonprofit equivalent of the “friendly takeover” in order to preserve a much needed and successful program in an organization that is otherwise not viable.

Questions to consider

There are a number of questions that nonprofit leaders can ask themselves in contemplating whether a merger or some other form of strategic partnership is a good move for their organization. Is there an overlap in consumers, funders, geographic area served and programs between your organization and others? Who are those organizations and do any share your mission and hold similar values? You may think you know the answer to these questions – and perhaps you do – but this is a good time to take a more thorough and perhaps more objective look at other organizations in your “market.” Talk to your funders and others in the community – what do they think of these organizations and can they imagine you working with any of them? Consider ways you might better serve your shared constituencies by working together. Would a merger allow you to provide administrative services in a more cost-effective manner that will allow you to channel more resources to programs and services?

Ultimately, the measure of success in a nonprofit merger is not whether the organization simply cut costs and survived (as it might be in the for-profit sector), but whether the merger resulted in its mission being better served. For us, that’s the bottom line.